REVISION

Chapter 1
What is accounting
- Three activities
o Identifies (Select economic events (transactions)) the economic
events relevant to its business
o Records (Record, classify, and summarize) those events in order to
provide a history of its financial activities. Recording consists of
keeping a systematic, chronological diary of events, measured in
monetary units
o Communicates (Prepare accounting reports & Analyze and
interpret for users) the collected information to interested users by
means of accounting reports. The most common of these reports are
called financial statements

- Who uses accounting data?

o Internal users of accounting information are managers who plan,
organize, and run the business. These include marketing managers,
production supervisors, finance directors, and company officers
o Managerial accounting provides internal reports to help users make
decisions about their companies. Examples are financial comparisons
of operating alternatives, projections of income from new sales
campaigns, and forecasts of cash needs for the next year.

o External users are individuals and organizations outside a company

who want financial information about the company. The two most
common types of external users are investors and creditors.

 Investors (owners) use accounting information to decide

whether to buy, hold, or sell ownership shares of a company.
 Creditors (such as suppliers and bankers) use accounting
information to evaluate the risks of granting credit or lending
money

DO IT! 1 Indicate whether each of the fi ve statements presented below is true or

false. If false, indicate how to correct the statement.
1. The three steps in the accounting process are identifi cation, recording, and
communication.
2. Bookkeeping encompasses all steps in the accounting process.
3. Accountants prepare, but do not interpret, financial reports.
4. The two most common types of external users are investors and company
officers.
5. Managerial accounting activities focus on reports for internal users.

1. True 2. False. Bookkeeping involves only the recording step. 3. False.

Accountants
analyze and interpret information in reports as part of the communication step. 4.
False. The
two most common types of external users are investors and creditors. 5. True.
Related exercise material: DO IT! 1.1, E1.1, and E1.2.

The building block of accounting

- Ethics in financial reporting
o
- Accounting standards
o two primary accounting standard-setting bodies
 International Accounting Standards Board (IASB)
 More than 130 countries follow standards referred to as
International Financial Reporting Standards (IFRS)
 Determine International Financial Reporting Standards
(IFRS)
 Financial Accounting Standards Board (FASB)
 Most companies in the United States follow standards
issued by the FASB, referred to as generally accepted
accounting principles (GAAP)
- Measurement principles
o Historical cost (giá trị cố định dựa trên chi phí chi)
 The historical cost principle (or cost principle) dictates that
companies record assets at their cost. This is true not only
at the time the asset is purchased, but also over the time the
asset is held. For example, if Great Wall Manufacturing
purchases land for ¥300,000 (amounts in thousands), the
company initially reports it in its accounting records at
¥300,000. But what does Great Wall do if, by the end of the
next year, the fair value of the land has increased to ¥400,000?
Under the historical cost principle, it continues to report the
land at ¥300,000.
 o Fair value (giá trị thay đổi theo thời gian theo thị trường)
 The fair value principle states that assets and liabilities should
be reported at fair value (the price received to sell an asset
or settle a liability). Fair value information may be more useful
than historical cost for certain types of assets and liabilities. For
example, certain investment securities are reported at fair value
because market value information is usually readily available
for these types of assets. In determining which measurement
principle to use, companies weigh the factual nature of cost fi
gures versus the relevance of fair value. In general, even though
IFRS allows companies to revalue property, plant, and
equipment and other long-lived assets to fair value, most
companies choose to use cost. Only in situations where assets
are actively traded, such as investment securities, do companies
apply the fair value principle extensively.
- Assumptions
o The monetary unit assumption
 requires that companies include in the accounting records
only transaction data that can be expressed in money terms.
This assumption enables accounting to quantify (measure)
economic events. The monetary unit assumption is vital to
applying the historical cost principle.

 This assumption prevents the inclusion of some relevant

information in the accounting records. For example, the health
of a company’s owner, the quality of service, and the morale of
employees are not included.

 The reason: Companies cannot quantify this information in

money terms. Though this information is important, companies
record only events that can be measured in money.

o The economic assumption

 Requires that the activities of the entity be kept separate and
distinct from the activities of its owner and all other
economic entities
 To illustrate, Barb Su, owner of Barb’s Bike Shop, must keep
her personal living costs separate from the expenses of the
business. Similarly, Maxway Cycles Co. (TWN) and Asia
 Bicycle Trading Company (TWN) are segregated into separate
economic entities for accounting purposes
o Bussiness types:
 Proprietorship. A business owned by one person is generally a
proprietorship. The owner is often the manager/operator of the
business. Small service-type businesses (plumbing companies,
beauty salons, and auto repair shops), farms, and small retail
stores (antique shops, clothing stores, and used-book stores) are
often proprietorships. Usually, only a relatively small amount
of money (capital) is necessary to start in business as a
proprietorship. The owner (proprietor) receives any profits,
suffers any losses, and is personally liable for all debts of the
business. There is no legal distinction between the business as
an economic unit and the owner, but the accounting records of
the business activities are kept separate from the personal
records and activities of the owner.

 Partnership. A business owned by two or more persons

associated as partners is a partnership. In most respects a
partnership is like a proprietorship except that more than one
owner is involved. Typically, a partnership agreement (written
or oral) sets forth such terms as initial investment, duties of
each partner, division of net income (or net loss), and
settlement to be made upon death or withdrawal of a partner.
Each partner generally has unlimited personal liability for the
debts of the partnership. Like a proprietorship, for accounting
purposes the partnership transactions must be kept separate
from the personal activities of the partners. Partnerships are
often used to organize retail and service-type businesses,
including professional practices (lawyers, doctors, architects,
and accountants).

 Corporation. A business organized as a separate legal entity

under jurisdiction corporation law and having ownership
divided into transferable shares is a corporation. The holders
of the shares (shareholders) enjoy limited liability; that is,
they are not personally liable for the debts of the corporate
entity. Shareholders may transfer all or part of their ownership
shares to other investors at any time (i.e., sell their shares). The
 ease with which ownership can change adds to the
attractiveness of investing in a corporation. Because ownership
can be transferred without dissolving the corporation, the
corporation enjoys an unlimited life. Although the combined
number of proprietorships and partnerships in the world
significantly exceeds the number of corporations, the revenue
produced by corporations is much greater
The basic accounting equation
- Assets
- Liabilities
- Equity
Using the Accounting equation
o Transactions (business transactions) are a business’s economic
events recorded by accountants. Transactions may be external or
internal.
 External transactions involve economic events between the
company and some outside enterprise. For example, Taipai
Pizza’s purchase of cooking equipment from a supplier,
payment of monthly rent to the landlord, and sale of pizzas to
customers are external transactions.
 Internal transactions are economic events that occur entirely
within one company. The use of cooking and cleaning supplies
are internal transactions for Taipai Pizza.
- Transaction analysis
- Summary of transactions
Financial statements
- Income statement
o The income statement reports the success or profitability of the
company’s operations over a specific period of time. The heading
of the statement identifies the company, the type of statement, and the
time period covered by the statement.

o The income statement lists revenues first, followed by expenses.

Then, the statement shows net income (or net loss). When revenues
exceed expenses, net income results. When expenses exceed revenues,
a net loss results. Although practice varies, we have chosen to list
expenses in order of magnitude in our illustrations
- Retained earnings statement
o Retained earnings statement reports the changes in retained
earnings for a specific period of time
o The first line of the statement shows the beginning retained earnings
amount. Then come net income and dividends. The retained
earnings ending balance is the final amount on the statement. The
information provided by this statement indicates the reasons why
retained earnings increased or decreased during the period. If
there is a net loss, it is deducted with dividends in the retained
earnings statemen
- Statement of financial position
 o Softbyte SA’s statement of financial position reports the assets,
liabilities, and equity at a specific date (September 30, 2020).

o Observe that the statement of financial position lists assets at the top,
followed by equity and then liabilities. Total assets must equal total
equity and liabilities. Softbyte SA reports only one liability, Accounts
Payable, on its statement of financial position. In most cases, there
will be more than one liability.

o The statement of financial position is like a snapshot of the

company’s financial condition at a specific moment in time
(usually the month-end or year-end).

- Statement of cash flows

o The statement of cash flows provides information on the cash
receipts and payments for a specific period of time. The statement
of cash flows reports
 (1) the cash effects of a company’s operations during a period,
 (2) its investing activities,
 (3) its financing activities,
 (4) the net increase or decrease in cash during the period, and
 (5) the cash amount at the end of the period
- Comprehensive income statement

1. (LO 1) Which of the following is not a step in the accounting

process?
a. Identification. c. Recording.
b. Economic entity. d. Communication.
2. (LO 1) Which of the following statements about users of accounting information
is incorrect?
a. Management is an internal user.
b. Taxing authorities are external users.
c. Present creditors are external users.
d. Regulatory authorities are internal users.

3. (LO 2) The historical cost principle states that:

a. assets should be initially recorded at cost and adjusted when
the fair value changes.
b. activities of an entity are to be kept separate and distinct from
its owner.
c. assets should be recorded at their cost.
d. only transaction data capable of being expressed in terms of
money be included in the accounting records.

4. (LO 2) Which of the following statements about basic assumptions is correct?

a. Basic assumptions are the same as accounting principles.
b. The economic entity assumption states that there should be a
particular unit of accountability.
c. The monetary unit assumption enables accounting to measure employee morale.
d. Partnerships are not economic entities.

5. (LO 2) The three types of business entities are:

a. proprietorships, small businesses, and partnerships.
b. proprietorships, partnerships, and corporations.
c. proprietorships, partnerships, and large businesses.
d. financial, manufacturing, and service companies.

6. (LO 3) Net income will result during a time period when:

a. assets exceed liabilities.
b. assets exceed revenues.
c. expenses exceed revenues.
d. revenues exceed expenses.

7. (LO 3) As of December 31, 2020, Stoneland AG has assets of

€3,500 and equity of €2,000. What are the liabilities for Stoneland
AG as of December 31, 2020?
a. €1,500. b. €1,000. c. €2,500. d. €2,000.
8. (LO 4) Performing services on account will have the following
effects on the components of the basic accounting equation:
a. increase assets and decrease equity.
b. increase assets and increase equity.
c. increase assets and increase liabilities.
d. increase liabilities and increase equity.

9. (LO 4) Which of the following events is not recorded in the accounting records?
a. Equipment is purchased on account.
b. An employee is terminated.
c. A cash investment is made into the business.
d. The company pays a cash dividend.

10. (LO 4) During 2020, Xia Lin Company’s assets decreased

¥500,000 and its liabilities decreased ¥900,000. Its equity therefore:
a. increased ¥400,000. c. decreased ¥400,000.
b. decreased ¥1,400,000. d. increased ¥1,400,000.
Practice Multiple-Choice QuestionsPractice Multiple-Choice Questions 1-29

11. (LO 4) Payment of an account payable affects the components of

the accounting equation in the following way.
a. decreases equity and decreases liabilities.
b. increases assets and decreases liabilities.
c. decreases assets and increases equity.
d. decreases assets and decreases liabilities.

12. (LO 5) Which of the following statements is false?

a. A statement of cash fl ows summarizes information about the
cash inflows (receipts) and outflows (payments) for a specific
period of time.
b. A statement of fi nancial position reports the assets, liabilities, and equity at a
specific date.
c. An income statement presents the revenues, expenses, assets,
and liabilities for a specifi c period of time.
d. A retained earnings statement summarizes the changes in
retained earnings for a specific period of time.

13. (LO 5) On the last day of the period, Jim Otto Company buys a
$900 machine on credit. This transaction will affect the:
a. income statement only.
b. statement of financial position only.
c. income statement and retained earnings statement only.
d. income statement, retained earnings statement, and statement of financial
position.

14. (LO 5) The financial statement that reports assets, liabilities, and
equity is the:
a. income statement.
b. retained earnings statement.
c. statement of financial position.
d. statement of cash flows.

*15. (LO 6) Services performed by a public accountant include:

a. auditing, taxation, and management consulting.
b. auditing, budgeting, and management consulting.
c. auditing, budgeting, and cost accounting.
d. internal auditing, budgeting, and management consulting

Chapter 2
Describe how accounts, debits, and credits are used to record business transactions
- The account
 o An account is an individual accounting record of increases and
decreases in a specific asset, liability, or equity item
o
- Debits and credits
o Dr./Cr. Procedures for Assets and Liabilities
 Asset accounts normally show debit balances. That is, debits to
a specific asset account should exceed credits to that account.
Likewise, liability accounts normally show credit balances.
That is, credits to a liability account should exceed debits to
that account. The normal balance of an account is on the side
where an increase in the account is recorded

 Knowing the normal balance in an account may help you trace

errors. For example, a credit balance in an asset account such as
Land or a debit balance in a liability account such as Salaries
and Wages Payable usually indicates an error. Occasionally,
though, an abnormal balance may be correct. The Cash
account, for example, will have a credit balance when a
company has overdrawn its bank balance by spending more
than it has in its account.
o Dr./Cr. Procedures for Equity
 ….
- Equity relationships
 o

o Companies report share capital—ordinary and retained earnings in the

equity section of the statement of financial position. They report
dividends on the retained earnings statement. And they report
revenues and expenses on the income statement. Dividends, revenues,
and expenses are eventually transferred to retained earnings at the end
of the period. As a result, a change in any one of these three items
affects equity.
- Summary of debit/credit rule
o

Indicate how a journal is used in the recording process.

- The recording process
o 1. Analyze each transaction in terms of its effect on the accounts.
o 2. Enter the transaction information in a journal.
 o 3. Transfer the journal information to the appropriate accounts in the
ledger.
o

- The journal
 1. It discloses in one place the complete effects of a transaction.
 2. It provides a chronological record of transactions.
 3. It helps to prevent or locate errors because the debit and
credit amounts for each entry can be easily compared.

o It is important to use correct and specific account titles in

journalizing. Erroneous account titles lead to incorrect financial
statements. However, some flexibility exists initially in selecting
account titles. The main criterion is that each title must appropriately
describe the content of the account. Once a company chooses the
specific title to use, it should record under that account title all later
transactions involving the account. In homework problems, you
should use specific account titles when they are given. When account
titles are not given, you may select account titles that identify the
nature and content of each account. The account titles used in
journalizing should not contain explanations such as Cash Paid or
Cash Received.

Explain how a ledger and posting help in the recording process.

- The ledger
o The entire group of accounts maintained by a company is the ledger.
The ledger provides the balance in each of the accounts as well as
keeps track of changes in these balances
 o

- Posting
o The procedure of transferring journal entries to the ledger accounts
is called posting. This phase of the recording process accumulates the
effects of journalized transactions into the individual accounts.
Posting involves the following steps.
o Posting should be performed in chronological order. That is, the
company should post all the debits and credits of one journal entry
before proceeding to the next journal entry. Postings should be
made on a timely basis to ensure that the ledger is up-to-date
- Chart of accounts
o This chart lists the accounts and the account numbers that identify
their location in the ledger. The numbering system that identifies the
accounts usually starts with the statement of financial position
accounts and follows with the income statement accounts.
- The recording process illustrated
- Summary illustration of journalizing and posting
Prepare a trial balance.
- Limitations of a trial balance
o A trial balance does not guarantee freedom from recording errors,
however (see Ethics Note).
o Numerous errors may exist even though the totals of the trial balance
columns agree. For example, the trial balance may balance even
when:
 1. A transaction is not journalized.
 2. A correct journal entry is not posted.
 3. A journal entry is posted twice.
 4. Incorrect accounts are used in journalizing or posting.
  5. Offsetting errors are made in recording the amount of a
transaction.

o As long as equal debits and credits are posted, even to the wrong
account or in the wrong amount, the total debits will equal the total
credits. The trial balance does not prove that the company has
recorded all transactions or that the ledger is correct
- Locating errors
o 1. If the error is €1, €10, €100, or €1,000, re-add the trial balance
columns and recompute the account balances.
o 2. If the error is divisible by 2, scan the trial balance to see whether a
balance equal to half the error has been entered in the wrong column.
o 3. If the error is divisible by 9, retrace the account balances on the trial
balance to see whether they are incorrectly copied from the ledger.
For example, if a balance was €12 and it was listed as €21, a €9 error
has been made. Reversing the order of numbers is called a
transposition error.
o 4. If the error is not divisible by 2 or 9, scan the ledger to see whether
an account balance in the amount of the error has been omitted from
the trial balance, and scan the journal to see whether a posting of that
amount has been omitted.

- Currency signs and underlining

o Note that currency signs do not appear in journals or ledgers.
Currency signs are typically used only in the trial balance and the
financial statements. Generally, a currency sign is shown only for the
first item in the column and for the total of that column. A single line
(a totaling rule) is placed under the column of figures to be added or
subtracted. Total amounts are double-underlined to indicate they are
final sums.

1. What is a business?
Businesses of whatever size or nature exist to make a profit.
There are a number of different ways of looking at a business. Some ideas are listed below.
 A business is a commercial or industrial concern which exists to deal in the manufacture,
resale or supply of goods and services.
 A business is an organisation which uses economic resources to create goods or services
which customers will buy.
 A business is an organisation providing jobs for people.
 A business invests money in resources (for example buildings, machinery, employees) in
order to make even more money for its owners.
This last definition introduces the important idea of profit. Businesses vary from very small
businesses (the local shopkeeper or plumber) to very large ones (Vodafone, IKEA, Google).
However, all of them want to earn profits.
Profit is the excess of income over expenditure. When expenditure exceeds revenue, the business
is running at a loss.
One of the jobs of an accountant is to measure income and expenditure, and so profit. It is not as
straightforward a task as it may seem.

2. Types of business entity

There are three main types of business entity.

 Sole traders. A sole tradership is a business owned and run by one individual, perhaps
employing one or two assistants and controlling their work. The individual's business and
personal affairs are, for legal and tax purposes, identical.

 Limited liability companies. Limited liability status means that the business's debts and the
personal debts of the business's owners (shareholders) are legally separate. The shareholders
cannot be sued for the debts of the business unless they have given some personal guarantee.
This is called limited liability.

 Partnerships. These are arrangements between individuals to carry on business in common

with a view to profit. A partnership, however, involves obligations to others, and so a
partnership is usually governed by a partnership agreement. Unless it is a limited liability
partnership (LLP), partners will be fully liable for debts and liabilities, for example if the
partnership is sued.
In law, sole traders and partnerships are not separate entities from their owners. However, a
limited liability company is legally a separate entity from its owners. Contracts can therefore be
issued in the company's name.
For accounting purposes, all three entities are treated as separate from their owners. This is
called the business entity concept.

3. Accounting standards
- In an attempt to deal with some of the subjectivity, and to achieve comparability between
different organisations, accounting standards were developed.
- These are developed at both a national level (in most countries) and an international level.
- The FFA/FA syllabus is concerned with International Financial Reporting Standards (IFRSs).
IFRSs are produced by the International Accounting Standards Board (IASB). The IASB
develops IFRSs.
 - The main objectives of the IFRS Foundation are to raise the standard of financial
reporting and eventually bring about global harmonisation of accounting standards.

- The International Accounting Standards Board (IASB) is an independent, privately

funded body that develops and approves IFRSs.
Prior to 2003, standards were issued as International Accounting Standards (IASs). In 2003 IFRS
1 was issued and all new standards are now designated as IFRSs. Therefore IFRSs encompass
both IFRSs, and IASs still in force (eg IAS 7).

The members of the IASB come from several countries and have a variety of backgrounds, with
a mix of auditors, preparers of financial statements, users of financial statements and academics.
The IASB operates under the oversight of the IFRS Foundation.
4. The qualitative characteristics of financial information

- Definition: Qualities or attributes that make financial accounting information useful to

users
- Fundamental qualitiative characteristics:
o Quality that make the information useful to the users in making economic
decisions
o Address the content or information
 Relevance
o The capacity of the information to make a difference in decisions made
by users
o Ex: For example, if a company wants to take a loan from a bank, then the
bank will want to know first whether the company will be able to pay
them back the loan with interest. Therefore, the company's financial
statements should be relevant.
 A financial statement is relevant, but it has data that is valuable enough to
make predictions or estimations about future events (Predictive and
confirmatory)
 Predictive and confirmatory values are interrelated, meaning often
information has both predictive and confirmatory values
 Materiality is not an ingredient of relevance, but rather an entity specific
aspect of relevance. Meaning all material items are relevant, but not all
relevant items are material. Hence, what is material to one entity may not
be material to another
 Faithful representation
o The information provides a true, correct and complete depiction of the
economic phenomena that it purports to represent.
o Ex if the inventory of entity A is determined to be at the cost of 100,000
pesos, it must be reported in the statement of financial position.With such
amount, if the amount is reported otherwise, it distorts the reliability of the
financial reports affecting the assets, net income and owners equity.
 Free from error. A financial statement is free from error if there
are no errors and inaccuracies in the description of the
phenomenon, and no errors are made in the process by which the
 financial information was produced. But that does not mean that
unaccuracies cannot rise.
 Completeness. Completeness means disclosure of all
information necessary for proper understanding of the underlying
phenomenon. It includes all necessary descriptions and
explanations.
 Neutrality an unbiased depiction of economics and involves
exercise of prudence such that neither current period earnings are
overstated or understated, nor those of future periods
- What is the difference of a fundamental qualitative characteristics and the
enhancing qualitative characteristics?
o The fundamental qualitative characteristics are essential, meaning information
must be both relevant and faithfully represented for it to be useful, on the
other hand enhancing qualitative characteristics only enhance the usefulness of
information that is both relevant and faithfully represented. It cannot make
information that is irrelevant or erroneous to be useful. In fact, it may have to
be sacrificed to maximize another qualitative characteristic.
- Enhancing qualitiative characteristics
o Qualities of information that enhances its usefulness
 Comparability
o Information is comparable if it helps users identify similarities and
differences between different sets of information that are provided
by a single entity but different periods or different entities in a single
period.Remember that comparisons overtime are difficult unless there
is consistency in the way accounting principles are applied across
fiscal years
 Verifiability
o Verifiability means that different knowledgeable and independent
observers could reach consensus that a particular depiction is a
faithful representation. Remember that financial information is
supported by evidence, and independent individuals can check them to
see whether such information is faithfully represented. In short,
information is verifiable if it can be audited.
 Timeliness
o Having information available to decision makers in time to influence
their decisions. Thus, financial information must be available or
communicated early enough when a decision is to be made.
Relevant information may lose its relevance if there is undue delay in
its reporting.For example, if a company issues its financial statements
the year after its accounting period, the users of financial statements
would find it difficult to determine how well the company is doing in
the present
 Understandability
o Financial information must be comprehensible or intelligible if it is
to be useful, but the complex matters cannot be eliminated. Because of
this, the framework requires the users to have a reasonable knowledge
 of business and economic activities and must review and analyze the
information diligently. If the information is classified, clearly and
concise, it will help to enhance understandability on the other hand
if the information is complicated and hard to understand, the users may
sometimes seek the help of an advisor to explain it

Define, understand and apply accounting concepts:

- Materiality
o Information is material if omitting it or misstating it could influence decisions
that users make on the basis of financial information about a specific
reporting.Entity materiality is an aspect of relevance which is entity specific
o Materiality is not an ingredient of relevance, but rather an entity specific aspect of
relevance.Meaning all material items are relevant, but not all relevant items are
material.
- Substance over form
- Going concern
o
- Business entity concept
o
- Accruals
- Prudence
- Consistency
o Consistency refers to the use of the same methods for the same items

Cash methods vs Accrual base of accounting

- Cash
o Recognize cost and income when cash is hand-exchanged
o Pros and cons
 Pros:
 Simple and easy to understand
 For small businesses operating in cash
 Cheap to maintain
 Many countries accept this for tax purposes
 Cons
 Most businesses are too complex to use this method of accounting
 Fluctuations in results (record in separate period)
 Cannot identify statement of position (not have payable and
receivable)
 Are not allowed under GAAP and IFRS
- Accrual base of accounting
o Revenue is recognized as it is earned and expenses is recorded as it is inccured
o This leads to matching principle
 Revenue, and all expenses inccured in order to generate that revenue, need
to be recognized in the same accounting period
o Pro and con
  Pro
 Business profitibility can be accurately measured at a specific time
period
 Use payable and receivable so can create statement of financial
position
 Financial statement under GAAP and IFRS
 Con
 Doesn’t track cash flow
 More complicated

PRACTICE MCQs
1. Who issues International Financial Reporting Standards?
A The IFRS Advisory Committee
B The stock exchange
C The International Accounting Standards Board
D The government

2. Which groups of people are most likely to be interested in the financial statements of a sole
trader?
1 Shareholders of the company
2 The business's bank manager
3 The tax authorities
4 Financial analysts
A 1 and 2 only
B 2 and 3 only
C 2, 3 and 4 only
D 1, 2 and 3 only

3. Which of the following are advantages of trading as a limited liability company?

1 Operating as a limited liability company makes raising finance easier because additional shares
can be issued to raise additional cash.
2 Operating as a limited liability company is more risky than operating as a sole trader because
the shareholders of a business are liable for all the debts of the business whereas the sole trader is
only liable for the debts up to the amount he has invested.
A 1 only
B 2 only
C Both 1 and 2
D Neither 1 or 2
4. Which of the following best describes corporate governance?
A Corporate governance is the system of rules and regulations surrounding financial reporting.
B Corporate governance is the system by which companies and other entities are directed and
controlled.
C Corporate governance is carried out by the finance department in preparing the financial
statements.
D Corporate governance is the system by which an entity monitors its impact on the natural
environment.

5. Identify which of the following statements are true or false.

1 The directors of a company are ultimately responsible for the preparation of financial
statements, even if the majority of the work on them is performed by the finance department.
2 If financial statements are audited, then the responsibility for those financial statements instead
falls on the auditors instead of the directors.
3 There are generally no laws surrounding the duties of directors in managing the affairs of
company.
A 1 only
B 2 only
C 2 and 3 only
D 1 and 3 only

6. Which ONE of the following statements correctly describes the contents of the Statement of
Financial Position?
A A list of ledger balances shown in debit and credit columns
B A list of all the assets owned and all the liabilities owed by a business
C A record of income generated and expenditure incurred over a given period
D A record of the amount of cash generated and used by a company in a given period

7. Which ONE of the following statements correctly describes the contents of the Statement of
Profit or Loss/Income Statement?
A A list of ledger balances shown in debit and credit columns
B A list of all the assets owned and all the liabilities owed by a business
C A record of income generated and expenditure incurred over a given period
D A record of the amount of cash generated and used by a company in a given period

8. Which of the following are TRUE of partnerships?

1 The partners' individual exposure to debt is limited.
2 Financial statements for the partnership by law must be produced and made public.
3 A partnership is not a separate legal entity from the partners themselves.
A 1 and 2 only
B 2 only
C 3 only*
D 1 and 3 only
 *Unless a partnership is a limited liability partnership, the partners' individual exposure to debt
is not limited because the partnership is not a separate legal entity from the partners themselves.
Financial records must be maintained by a partnership, but there is no requirement to make them
publicly available unless the partnership is a limited liability partnership.

9. Which of the following statements is/are true?

1 Directors of companies have a duty of care to show reasonable competence in their
management of the affairs of a company.
2 Directors of companies must act honestly in what they consider to be the best interest of the
company.
3 A Director's main aim should be to create wealth for the shareholders of the company.
A 1 and 2 only
B 2 only
C 1, 2 and 3
D 1 and 3 only

10. Which of the following statements is/are true?

1 The IFRS Interpretations Committee is a forum for the IASB to consult with the outside world.
2 The IFRS Foundation produces IFRSs. The IFRS Foundation is overseen by the IASB.
3 One of the objectives of the IFRS Foundation is to bring about convergence of national
accounting standards and IFRSs.
A 1 and 3 only
B 2 only
C 2 and 3 only
D 3 only

What is the main function of the IFRS Interpretations Committee?

The role of the Interpretations Committee is to interpret the application of
IFRS® Standards to ensure consistent accounting practices throughout the world and to
provide timely guidance on financial reporting issues that are not specifically addressed
in IFRS Standards, within the context of the Board's Conceptual 

IFRSs are produced by the International Accounting Standards Board (IASB).

The IASB operates under the oversight of the IFRS Foundation.

The objectives of the IFRS Foundation are as follow:

1.To develop, in the public interest, a single set of high-quality, understandable,enforceable, and
globally accepted financial reporting standards based upon clearly articulated principles. These
standards should require high-quality, transparent, and comparable information in financial
statements and other financial reporting to help investors, other participants in the world's capital
markets, and other users of financial information make economic decisions.

2.To promote the use and rigorous application of those standards

3.In fulfilling the objectives associated with the first two objectives, to take account of,
asappropriate, the needs of a range of sizes and types of entities in diverse economic settings.
4.To promote and facilitate adoption of IFRSs, being the standards and interpretationsissued by
the IASB, through the convergence of national accounting standards and IFRSs

11. What is the role of the IASB?

A Oversee the standard setting and regulatory process
B Formulate international financial reporting standards
C Review defective accounts
D Control the accountancy profession

12. Which ONE of the following is NOT an objective of the IFRS Foundation?
A Through the IASB, develop a single set of globally accepted International Financial Reporting
Standards (IFRSs)
B Promote the use and rigorous application of International Financial Reporting Standards
(IFRSs)
C Ensure International Financial Reporting Standards (IFRSs) focus primarily on the needs of
global, multi-national organisations
D Bring about the convergence of national accounting standards and IFRSs

13. Which ONE of the following statements correctly describes how International Financial
Reporting Standards (IFRSs) should be used?
A To provide examples of best financial reporting practice for national bodies who develop their
own requirements
B To ensure high ethical standards are maintained by financial reporting professionals
internationally
C To facilitate the enforcement of a single set of global financial reporting standards
D To prevent national bodies from developing their own financial reporting standards

14. Which accounting concept should be considered if the owner of a business takes goods from
inventory for their own personal use?
A The materiality concept
B The accruals concept
C The going concern concept
D The business entity concept

15. Sales revenue should be recognised when goods and services have been supplied; costs are
incurred when goods and services have been received.
Which accounting concept governs the above?
A The business entity concept
B The materiality concept
C The accruals concept
D The duality concept

16. Which accounting concept states that omitting or misstating this information could influence
users of the financial statements?
A The consistency concept
B The accruals concept
C The materiality concept
D The going concern concept

17. According to the IASB's Conceptual Framework for Financial Reporting, which TWO of the
following are part of faithful representation?
1 It is neutral
2 It is relevant
3 It is presented fairly
4 It is free from material error
A 1 and 2
B 2 and 3
C 1 and 4
D 3 and 4

18. Which of the following accounting concepts means that similar items should receive a
similar accounting treatment?
A Conformity
B Accruals
C Matching
D Consistency

19. Listed below are some characteristics of financial information.

1 Relevance
2 Consistency
3 Faithful representation
4 Accuracy
Which TWO of these are qualitative characteristics of financial information according to the
IASB's Conceptual Framework for Financial Reporting?
A 1 and 2
B 2 and 4
C 3 and 4
D 1 and 3

20. Which ONE of the following statements describes faithful representation, a qualitative
characteristic of faithful representation?
A Revenue earned must be matched against the expenditure incurred in earning it.
B Having information available to decision-makers in time to be capable of influencing their
decisions.
C The presentation and classification of items in the financial statements should stay the same
from one period to the next.
D Financial information should be complete, neutral and free from error.

21. Listed below are some comments on accounting concepts.

1 Financial statements always treat the business as a separate entity.
2 Materiality means that only items having a physical existence may be recognised as assets.
3 Provisions are estimates and therefore can be altered to make the financial results of a business
more attractive to investors.

Which, if any, of these comments is correct, according to the IASB's Conceptual Framework for
Financial Reporting?
A 1 only
B 2 only
C 3 only
D None of them

22. Which one of the following can the accounting equation can be rewritten as?
A Assets + profit – drawings – liabilities = closing capital
B Assets – liabilities – drawings = opening capital + profit
C Assets – liabilities – opening capital + drawings = profit
D Assets – profit – drawings = closing capital – liabilities

23. A trader's net profit for the year may be computed by using which of the following formulae?
A Opening capital + drawings – capital introduced – closing capital
B Closing capital + drawings – capital introduced – opening capital*
C Opening capital – drawings + capital introduced – closing capital
D Opening capital – drawings – capital introduced – closing capital
*Closing capital – opening capital = increase in net assets = new capital + profit – drawings

24. The profit earned by a business in 20X7 was $72,500. The proprietor injected new capital of
$8,000 during the year and withdrew goods for his private use which had cost $2,200.
If net assets at the beginning of 20X7 were $101,700, what were the closing net assets?
A $35,000
B $39,400
C $168,400
D $180,000*
*Increase in net assets = new capital + profit – drawings = $(8,000 + 72,500 – 2,200) = $78,300
Closing net assets = $(101,700 + 78,300) = $180,000

25. The profit made by a business in 20X7 was $35,400. The proprietor injected new capital of
$10,200 during the year and withdrew a monthly salary of $500.
If net assets at the end of 20X7 were $95,100, what was the proprietor's capital at the beginning
of the year?
A $ 55,500*
B $ 45,600
C $ 45,100
D $ 39,600
*Increase in net assets = new capital + profit – drawings = $(10,200 + 35,400 – 6,000) = $39,600
Opening capital = opening net assets = $(95,100 – 39,600) = $55,500

26. A sole trader took some goods costing $800 from inventory for his own use. The normal
selling price of the goods is $1,600.
Which of the following journal entries would correctly record this?

27. A business can make a profit and yet have a reduction in its bank balance. Which ONE of the
following might cause this to happen?
A The sale of non-current assets at a loss
B The charging of depreciation in the statement of profit or loss
C The lengthening of the period of credit given to customers
D The lengthening of the period of credit taken from suppliers

28. The net assets of Altese, a trader, at 1 January 20X2 amounted to $128,000. During the year
to 31 December 20X2 Altese introduced a further $50,000 of capital and made drawings of
$48,000. At 31 December 20X2 Altese's net assets totalled $184,000.
What is Altese's total profit or loss for the year ended 31 December 20X2?
A $54,000 profit*
B $54,000 loss
C $42,000 loss
D $58,000 profit
*Increase in net assets = Capital introduced + profit – drawings
184,000 – 128,000 = 50,000 + profit – 48,000
Profit = 56,000 – 50,000 + 48,000 = $54,000

29. Jones Co has the following transactions:

1 Payment of $400 to J Bloggs for a cash purchase
2 Payment of $250 to J Doe in respect of an invoice for goods purchased last month
What are the correct ledger entries to record these transactions?
30. Which of the following is/are examples of payables of a business?
1 Interest owed from the bank
2 Loans and advances to employees
3 Money owed from customers
4 Tax owed to the tax authority
A 1 and 3 only
B 2 and 3 only
C 2 and 4 only
D 4 only
1. Who issues International Financial Reporting Standards?
A The IFRS Advisory Committee
B The stock exchange
C The International Accounting Standards Board
D The government

2. Which groups of people are most likely to be interested in the financial statements of a sole
trader?
1 Shareholders of the company
2 The business's bank manager
3 The tax authorities
4 Financial analysts
A 1 and 2 only
B 2 and 3 only
C 2, 3 and 4 only
D 1, 2 and 3 only

3. Which of the following are advantages of trading as a limited liability company?

1 Operating as a limited liability company makes raising finance easier because additional shares
can be issued to raise additional cash.
2 Operating as a limited liability company is more risky than operating as a sole trader because
the shareholders of a business are liable for all the debts of the business whereas the sole trader is
only liable for the debts up to the amount he has invested.
A 1 only
B 2 only
C Both 1 and 2
D Neither 1 or 2

4. Which of the following best describes corporate governance?

A Corporate governance is the system of rules and regulations surrounding financial reporting.
B Corporate governance is the system by which companies and other entities are directed and
controlled.
C Corporate governance is carried out by the finance department in preparing the financial
statements.
D Corporate governance is the system by which an entity monitors its impact on the natural
environment.

5. Identify which of the following statements are true or false.

1 The directors of a company are ultimately responsible for the preparation of financial
statements, even if the majority of the work on them is performed by the finance department.
2 If financial statements are audited, then the responsibility for those financial statements instead
falls on the auditors instead of the directors.
3 There are generally no laws surrounding the duties of directors in managing the affairs of
company.
A 1 only
B 2 only
C 2 and 3 only
D 1 and 3 only

6. Which ONE of the following statements correctly describes the contents of the Statement of
Financial Position?
A A list of ledger balances shown in debit and credit columns
B A list of all the assets owned and all the liabilities owed by a business
C A record of income generated and expenditure incurred over a given period
D A record of the amount of cash generated and used by a company in a given period

7. Which ONE of the following statements correctly describes the contents of the Statement of
Profit
or Loss/Income Statement?
A A list of ledger balances shown in debit and credit columns
B A list of all the assets owned and all the liabilities owed by a business
C A record of income generated and expenditure incurred over a given period
D A record of the amount of cash generated and used by a company in a given period

8. Which of the following are TRUE of partnerships?

1 The partners' individual exposure to debt is limited.
2 Financial statements for the partnership by law must be produced and made public.
3 A partnership is not a separate legal entity from the partners themselves.
A 1 and 2 only
B 2 only
C 3 only*
D 1 and 3 only
 *Unless a partnership is a limited liability partnership, the partners' individual exposure to debt
is not limited because the partnership is not a separate legal entity from the partners themselves.
Financial records must be maintained by a partnership, but there is no requirement to make them
publicly available unless the partnership is a limited liability partnership.

9. Which of the following statements is/are true?

1 Directors of companies have a duty of care to show reasonable competence in their
management of the affairs of a company.
2 Directors of companies must act honestly in what they consider to be the best interest of the
company.
3 A Director's main aim should be to create wealth for the shareholders of the company.
A 1 and 2 only
B 2 only
C 1, 2 and 3
D 1 and 3 only

10. Which of the following statements is/are true?

1 The IFRS Interpretations Committee is a forum for the IASB to consult with the outside world.
2 The IFRS Foundation produces IFRSs. The IFRS Foundation is overseen by the IASB.
3 One of the objectives of the IFRS Foundation is to bring about convergence of national
accounting standards and IFRSs.
A 1 and 3 only
B 2 only
C 2 and 3 only
D 3 only

11. What is the role of the IASB?

A Oversee the standard setting and regulatory process
B Formulate international financial reporting standards
C Review defective accounts
D Control the accountancy profession

12. Which ONE of the following is NOT an objective of the IFRS Foundation?
A Through the IASB, develop a single set of globally accepted International Financial Reporting
Standards (IFRSs)
B Promote the use and rigorous application of International Financial Reporting Standards
(IFRSs)
C Ensure International Financial Reporting Standards (IFRSs) focus primarily on the needs of
global, multi-national organisations
D Bring about the convergence of national accounting standards and IFRSs

13. Which ONE of the following statements correctly describes how International Financial
Reporting Standards (IFRSs) should be used?
A To provide examples of best financial reporting practice for national bodies who develop their
own requirements
B To ensure high ethical standards are maintained by financial reporting professionals
internationally
C To facilitate the enforcement of a single set of global financial reporting standards
D To prevent national bodies from developing their own financial reporting standards

14. Which accounting concept should be considered if the owner of a business takes goods from
inventory for their own personal use?
A The materiality concept
B The accruals concept
C The going concern concept
D The business entity concept

15. Sales revenue should be recognised when goods and services have been supplied; costs are
incurred when goods and services have been received.
Which accounting concept governs the above?
A The business entity concept
B The materiality concept
C The accruals concept
D The duality concept
16. Which accounting concept states that omitting or misstating this information could influence
users of the financial statements?
A The consistency concept
B The accruals concept
C The materiality concept
D The going concern concept

17. According to the IASB's Conceptual Framework for Financial Reporting, which TWO of the
following are part of faithful representation?
1 It is neutral
2 It is relevant
3 It is presented fairly
4 It is free from material error
A 1 and 2
B 2 and 3
C 1 and 4
D 3 and 4

18. Which of the following accounting concepts means that similar items should receive a
similar accounting treatment?
A Conformity
B Accruals
C Matching
D Consistency

19. Listed below are some characteristics of financial information.

1 Relevance
2 Consistency
3 Faithful representation
4 Accuracy
Which TWO of these are qualitative characteristics of financial information according to the
IASB's Conceptual Framework for Financial Reporting?
A 1 and 2
B 2 and 4
C 3 and 4
D 1 and 3

20. Which ONE of the following statements describes faithful representation, a qualitative
characteristic of faithful representation?
A Revenue earned must be matched against the expenditure incurred in earning it.
B Having information available to decision-makers in time to be capable of influencing their
decisions.
C The presentation and classification of items in the financial statements should stay the same
from one period to the next.
D Financial information should be complete, neutral and free from error.
21. Listed below are some comments on accounting concepts.
1 Financial statements always treat the business as a separate entity.
2 Materiality means that only items having a physical existence may be recognised as assets.
3 Provisions are estimates and therefore can be altered to make the financial results of a business
more attractive to investors.
Which, if any, of these comments is correct, according to the IASB's Conceptual Framework for
Financial Reporting?
A 1 only
B 2 only
C 3 only
D None of them

22. Which one of the following can the accounting equation can be rewritten as?
A Assets + profit – drawings – liabilities = closing capital
B Assets – liabilities – drawings = opening capital + profit
C Assets – liabilities – opening capital + drawings = profit
D Assets – profit – drawings = closing capital – liabilities

23. A trader's net profit for the year may be computed by using which of the following formulae?
A Opening capital + drawings – capital introduced – closing capital
B Closing capital + drawings – capital introduced – opening capital*
C Opening capital – drawings + capital introduced – closing capital
D Opening capital – drawings – capital introduced – closing capital
*Closing capital – opening capital = increase in net assets = new capital + profit – drawings

24. The profit earned by a business in 20X7 was $72,500. The proprietor injected new capital of
$8,000 during the year and withdrew goods for his private use which had cost $2,200.
If net assets at the beginning of 20X7 were $101,700, what were the closing net assets?
A $35,000
B $39,400
C $168,400
D $180,000*
*Increase in net assets = new capital + profit – drawings = $(8,000 + 72,500 – 2,200) = $78,300
Closing net assets = $(101,700 + 78,300) = $180,000

25. The profit made by a business in 20X7 was $35,400. The proprietor injected new capital of
$10,200 during the year and withdrew a monthly salary of $500.
If net assets at the end of 20X7 were $95,100, what was the proprietor's capital at the beginning
of the year?
A $ 55,500*
B $ 45,600
C $ 45,100
D $ 39,600
*Increase in net assets = new capital + profit – drawings = $(10,200 + 35,400 – 6,000) = $39,600
Opening capital = opening net assets = $(95,100 – 39,600) = $55,500
26. A sole trader took some goods costing $800 from inventory for his own use. The normal
selling price of the goods is $1,600.
Which of the following journal entries would correctly record this?

27. A business can make a profit and yet have a reduction in its bank balance. Which ONE of the
following might cause this to happen?
A The sale of non-current assets at a loss
B The charging of depreciation in the statement of profit or loss
C The lengthening of the period of credit given to customers
D The lengthening of the period of credit taken from suppliers

28. The net assets of Altese, a trader, at 1 January 20X2 amounted to $128,000. During the year
to 31 December 20X2 Altese introduced a further $50,000 of capital and made drawings of
$48,000. At 31 December 20X2 Altese's net assets totalled $184,000.
What is Altese's total profit or loss for the year ended 31 December 20X2?
A $54,000 profit*
B $54,000 loss
C $42,000 loss
D $58,000 profit
*Increase in net assets = Capital introduced + profit – drawings
184,000 – 128,000 = 50,000 + profit – 48,000
Profit = 56,000 – 50,000 + 48,000 = $54,000

29. Jones Co has the following transactions:

1 Payment of $400 to J Bloggs for a cash purchase
2 Payment of $250 to J Doe in respect of an invoice for goods purchased last month
What are the correct ledger entries to record these transactions?
30. Which of the following is/are examples of payables of a business?
1 Interest owed from the bank
2 Loans and advances to employees
3 Money owed from customers
4 Tax owed to the tax authority
A 1 and 3 only
B 2 and 3 only
C 2 and 4 only
D 4 only